The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001

Guido Travaglini

MPRA Paper from University Library of Munich, Germany

Abstract: This paper combines two major strands of literature: structural breaks and Taylor rules. At first, I propose a nonstandard t-test statistic for detecting multiple level and trend breaks of I(0) series by supplying theoretical and limit-distribution critical values obtained from Montecarlo experimentation. Thereafter, I introduce a forward-looking Taylor rule expressed as a dynamic model which allows for multiple breaks and reaction-function coefficients of the leads of inflation, of the output gap and of an equity market index. Sequential GMM estimation of the model, applied to the Effective Federal Funds Rate for the period 1984:01-2001:06, produces three main interesting results: the existence of significant structural breaks, the substantial role played by inflation in the FOMC decisions and a marked equity targeting policy approach. Such results reveal departures from rationality, determined by structured and unstructured uncertainty, which the Fed systematically attempts at reducing by administering inflation scares and misinformation about the actual Phillips curve, in order to keep the output and equity markets under control.

Keywords: Generalized Method of Moments; Monetary Policy Rules; Multiple Breaks (search for similar items in EconPapers)
JEL-codes: C12 C61 E58 (search for similar items in EconPapers)
Date: 2007-06-06, Revised 2007-06-15
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:3419

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